Key takeaways
- When reviewing director deferred compensation, consider whether deferrals should apply to cash, equity, or both.
- Companies should review existing director deferral programs or implement one to support current and prospective directors.
As boards and compensation committees ensure their director pay programs remain competitive, shareholder-aligned and fit for purpose, one program feature deserves renewed attention: The ability for directors to defer receipt and taxation of compensation.
The opportunity for directors to voluntarily defer their compensation can strengthen a non-employee director pay program by providing financial planning flexibility while reinforcing long-term shareholder alignment — often without increasing underlying compensation levels.
Deferral programs are neither new nor uncommon, but they remain far from universal. That creates a practical opportunity to consider the merits of implementing a deferral program for the first time or enhancing an existing one.
What is a director deferred compensation program?
In a director deferred compensation program, before compensation is earned, non-employee directors can voluntarily elect to defer receipt of board compensation until a future date. Eligible compensation often includes equity compensation and may include cash retainers and fees. Depending on design, deferred amounts may be credited as cash, deferred stock units (DSUs) or other notional investment vehicles.
These programs typically are designed to comply with applicable deferred compensation rules, including U.S. Internal Revenue Service Section 409A. In general, that means directors must make elections in advance and specify the timing and form of future distributions. When structured properly, the program can help directors manage timing of income recognition and taxation while preserving the company’s broader director compensation framework.
Design matters: Eligible compensation and director choice
When considering whether to implement a new deferral program or modify an existing one, a company must determine the desired program scope. WTW’s Global Executive Compensation Analysis Team (GECAT) reviewed the prevalence of director deferred compensation provisions among S&P 500 companies over the five-year period of 2020-2024.
The analysis revealed that about one-half of companies permit directors to defer both cash and equity compensation. Others provide for deferrals of cash retainers and fees, and a smaller portion permit only equity compensation to be deferred (Figure 1).
These distinctions shape how directors experience the program. Cash deferrals can help manage income timing and tax planning. Equity deferrals may preserve or extend exposure to company stock and reinforce alignment with shareholders. Programs that permit both cash and equity deferrals provide the broadest planning flexibility, and large-cap company prevalence of cash and equity deferral programs grew to more than 50% in recent years.
The form of equity compensation also determines whether it may be deferred. In North America, directors’ equity grants typically are delivered as restricted stock units (RSUs), DSUs, restricted stock awards (RSAs) or fully vested common shares. RSUs and DSUs may be deferred, but RSAs and common shares cannot.
In practice, many companies that permit equity deferrals use DSUs because they preserve economic alignment with shareholders while allowing directors to defer settlement until separation from the board (or later, if the plan allows). This approach can support stock ownership objectives without requiring directors to take immediate delivery of shares. Thus, the core design question is whether an existing program does — or a new program should — provide directors with meaningful deferral flexibility without creating unnecessary administrative complexity.
Deferral programs are common, but not universal
In the five-year period reviewed, prevalence among S&P 500 companies remained steady at 69% in 2020 and 70% in 2024. This indicates that deferral programs are part of the director pay toolkit across much of the large-cap market. For these companies, revisiting existing provisions in context of overall pay program objectives may be worthwhile.
The inverse finding is equally important: About 30% of S&P 500 companies — and an even greater percentage of mid- and small-cap companies — do not offer directors any ability to defer compensation. For those organizations, the absence of a deferral program may be worth reassessing as part of a broader director compensation review.
Why adoption is not universal
The lack of a deferral program by nearly one-third of companies — or lack of deferral opportunities for either cash or equity by nearly one-half (46%) — does not necessarily suggest that some companies view director deferral programs unfavorably. More often, it reflects practical trade-offs involved in adding another feature to the director compensation program.
A deferral program can provide meaningful flexibility, but it also requires thoughtful design, clear election procedures, ongoing recordkeeping and coordination across legal, tax, finance and administrative functions. Boards also need to determine whether directors would value the program and whether it would materially improve the overall compensation framework.
For some companies, the answer may be yes, particularly when directors value tax planning flexibility or the company wants to reinforce long-term stock ownership. For others, existing pay practices may be viewed as sufficient, making a deferral program a lower priority.
Importantly, director deferral programs have not been a focus of shareholder scrutiny. Investors and proxy advisors tend to concentrate on core governance and pay matters such as director pay levels, equity ownership, independence and overall alignment with shareholder interests. Because a deferral program typically does not increase compensation value but instead allows directors to elect the timing and form of future receipt, many shareholders appear largely indifferent to whether such a program exists.
How deferral programs complement standard director pay practices
Standard features of directors’ pay programs are nearly universal among S&P 500 companies (Figure 2).
Figure 2. Standard features of directors’ pay programs among S&P 500 companies
| Program feature | Purpose | 2024 prevalence |
|---|---|---|
| Annual cash retainer | Compensate for service and time | 97% |
| Annual equity grant | Compensate for service and time and align with shareholders’ interests | 99% |
| Additional pay for leadership role | Compensate for additional leadership service and time | 95% |
| Stock ownership guideline | Support ongoing shareholder alignment | 96% |
Source: WTW Global Executive Compensation Analysis Team review of U.S. director pay trends among S&P 500 companies, including prevalence and design features of director compensation programs, annual equity practices and miscellaneous pay program features.
A deferral program can complement core features by providing financial flexibility to directors — many of whom may not need near-term receipt of income from their board service — while enhancing consistency between the company’s director compensation philosophy, ownership expectations and long-term governance objectives. Consequently, a deferral program that is well designed, communicated and administered can support varied financial planning needs of current directors while enhancing the attractiveness of board service for prospective directors.
Key design and administrative questions for boards
Boards considering a new or refreshed deferral program should focus on the design choices that will determine whether the program is straightforward, useful and aligned with overall director-pay objectives.
- Which compensation is eligible for deferral: cash only, equity only or both cash and equity?
- How will deferred amounts be credited: cash account, DSUs, other notional investment alternatives or a combination?
- When will distributions occur: separation from board service, change in control or another permitted event?
- What election process will satisfy applicable timing and documentation requirements?
- How will the company administer accounts, communicate balances and coordinate tax, legal, finance and payroll responsibilities?
Looking ahead
While director deferral programs have become part of the director-pay mainstream among large-cap companies, not every large-cap company has adopted one, and prevalence is lower among mid- and small-cap companies. That may leave room for continued incremental consideration, particularly as boards review directors’ compensation through lenses of flexibility, market competitiveness, shareholder alignment, long-term stock ownership (when equity deferrals are allowed) and attraction and retention of future directors.
Boards should not assume that every director will elect to defer compensation. The value of a deferral program often lies less in universal participation and more in providing flexibility to those directors who have a meaningful need or preference for deferral. For companies without a deferral program, and for those that have not recently revisited their program, the topic deserves a place on the board’s review agenda.
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